Phantom Square Footage
October 22, 2017
I would have to guess that we may have annoyed a client this week because we would not drop an issue. Their leases required the inclusion of licensee square footage in Gross Leasable Area (GLA). Generally, most standard leases today define licensees as exclusions when calculating prorata shares. (Licensees themselves are typically defined as short term agreements less than 12, 18 or 24 months.) So, if you have a 1,000 square foot premises that is occupied by a temporary tenant, that 1,000 square feet would come out of the denominator when calculating the prorata share for tenants where licensees are excludable.
But, licensees are not in just inline space. In retail, most cart (retail merchandising units, or RMUs) are license agreements. With this particular client, because of the wording that required license agreements to be included in GLA, as they added a cart to the center, they were required to add the square footage to GLA. Without considering the consequences, the instead of adding 32 square feet when adding a 4’ x 8’ cart, they actually added 192 square feet which accounted for a 4’ perimeter all around the cart (4’ plus 4’ on either side (12’) x 8’ plus 4’ on either side (16’). In this case, 160’ more than actually existed. So, we saw that going in to a denominator with no reimbursement. If CAM and taxes total $20 per square foot, by including that additional square footage, they were absorbing $3,200.
But, on top of that, once the square footage was added to the center, it remained there – in total GLA. If the cart was used 6 weeks per year, the 192 square feet was included year round. One issue was what they did with the carts and other RMUs when they were not in use. The casual answer was that they were left in the common area and used by other tenants for advertising. The answer we were looking for was that they were stored elsewhere (so that we could take them out of GLA).
Why was that so important? For two reasons. The first is that absorption factor. Believe it or not, there was 4,000 square feet of what we considered phantom square footage being carried on the rent roll. 4,000 square feet at $20 per square foot = $80,000 of absorption!!!!! $80,000!!!!! The second reason was that a number of tenants in the center have cotenancy provisions in their leases based upon the occupancy of the inline GLA. Think about this – If you have 200,000 square feet of inline GLA and 20,000 square feet of inline GLA vacancy, you are at 90% occupancy. But, if you are also have 4,000 square feet of “phantom” license square footage that is vacant, you are at 88.23% occupancy (180,000 sf of occupied inline / 204,000 sf). If you have tenants that have 90% cotenancy requirements, that 4,000 square feet of phantom square footage cause a cotenancy violation.
So, we got the answer, and we asked again. And again. And pointed out that the rent roll carried 35+ vacant RMUs. In reality, there were three vacant RMUs in the common area, but the rent roll have never been “cleaned up.”
It’s worth taking a look at your rent roll, compare it to the lease plan and account for all of your square footage. There truly are both financial and non-financial consequences if you don’t.
(The gif comes from what some (at least me!) miht say is the greatest movie of all time, The Princess Bride, in honor of the 30th anniversary of its release this month. You’re welcome!)